Federal Reserve Press Release In Plain English – July 2022

Originally published: July 2022

The fact that the federal funds rate went up is among the biggest foregone conclusions of the century. The real debate was whether the Federal Reserve would go up 0.75% or a full point. The Federal Open Market Committee opted for the former.

Of course, the Fed is doing this right now because inflation is a major concern. If you’re in the market for a mortgage, it’s important to lock your rate if you see one that you like. 

If you’re interested, lock your rate. My commentary on the Fed announcement is in bold below.

Recent indicators of spending and production have softened. Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.

This outlook from the Fed is a bit more cautious than what we’ve seen recently. Jobs are still being added to the economy and the unemployment rate is low, but they’re worried about lessening consumer spending and production. In addition, there’s pretty much an admission here that inflation is having a tremendous effect across the economy. It’s not like it’s one cause either.

There are supply and demand issues related to the pandemic, higher prices for gas and food and the fact that once prices start to go up, they go up faster because inflation can be a self-fulfilling prophecy. Producers raise prices because they get concerned about margins after their suppliers make increases. It can be quite a cycle.

Russia's war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.

The war in Ukraine and the sanctions that have gone along with it aren’t helping the situation. It’s having a tremendous effect on oil prices, which has an effect on everything else because your goods need to get to the market somehow.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2-1/2 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.

As always, this is the portion of the release everyone looks at first. There’s a lot packed in here, so let’s break this down.

The first thing to look at is the fact that the committee increased the range for the federal funds rate by 0.75% to a range between 2.25% – 2.5%. Mortgage rates aren’t directly impacted by this, but all consumer interest rates tend to follow the same general direction as the rates set by the central bank.

What has a direct impact is the Federal Reserve’s plan to reduce its holdings of agency mortgage-backed securities (MBS). The rates of return on MBS directly impact mortgage rates. If people feel optimistic about the economy, they tend to invest more in stocks and less in bonds like MBS. When this happens, MBS yields go up along with mortgage rates to attract investors. When people feel they need a safe haven, they go back to bonds, and mortgage rates tend to go down.

What I just described is the normal functioning of the market. Over the past several years, the Fed has been buying a ton of MBS to help mortgage rates stay low because housing is such a big part of the economy.

One of the reasons the Federal Reserve has decided now is the time to reduce the number of MBS it holds is that the low-rate environment has pushed home prices through the roof in many areas of the country. And because housing is such a huge portion of monthly budgets, this contributes heavily to inflation.

The Federal Reserve started selling their MBS at a slower pace and they will ramp it up in September. The good news is that because mortgages are transferred to investors up to 60 days or more after closing, the increased pace of sales should be baked into mortgage rates. This means that the runoff of mortgage bonds themselves shouldn’t have an effect on whether rates are higher.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

This is the paragraph where the Fed says what it looks at in making decisions. I draw your attention particularly to inflation pressures and inflation expectations. Pressures are the current conditions that are causing price increases while expectations are where people think inflation will be in the future. However, this is important because as mentioned earlier, inflation can end up being a self-fulfilling prophecy.

People will pay higher prices now if they think there’s a chance that prices will go up later.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lael Brainard; James Bullard; Susan M. Collins; Lisa D. Cook; Esther L. George; Philip N. Jefferson; Loretta J. Mester; and Christopher J. Waller.

It was a united front this time around.

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